Business activities in Israel might involve different aspects of Tax, VAT, Witholding tax (WHT), employees income, derived from activities considered or not considered as a Permanent Establishment, period of projects, registration formats, tax treaties and others.
Tax aspects by Israel tax authorities (ita)
Main Tax principles according to Israeli Income Tax Ordinance are:
- Israeli residents, either individuals or corporations, are subject to income tax on their worldwide “taxable income”.
- Non-residents are subject to tax on any income derived from an Israeli source. Where there is a double tax convention between Israel and the other countries, its terms may modify the taxable income.
If a foreign corporation is situated in a country with which Israel has entered into a double taxation treaty, the foreign entity will be subject to Israeli tax only if its activities in Israel are based on a “permanent establishment” (PE).
An establishment is defined in taxation treaties as either:
- A physical, permanent place of business available for use by the foreign corporation, or
- A local agent of the corporation who is vested with the authority to execute contracts on behalf of the corporation (considered as a “dependent agent”).
1. Physical, permanent place of business available for use by the foreign corporation:
- The existence of an “business establishment” as office, facility, store and others.
- This business establishment must be “fixed”.
- The foreign enterprise carries out all or part of its business activities through the fixed business establishment.
2. Dependent Agent:
The activities of a dependent agent may give rise to a PE for the principal/enterprise.
Dependent agents may include a person (or company) who has and habitually exercises in a State, an authority to conclude contracts in the name of the enterprise (unless his activities are limited to the purchase of goods or merchandise for the enterprise), dependent agents might include employees or others under the control of the principal/enterprise.
Allocating profits of PE in Israel according to ITA:
Allocation of profits will be determined in two stages:
- Analyzing data of the PE in Israel as a separate entity from the foreign company (of which the PE is part).
- Pricing the transactions between the PE and its foreign company – internal transactions, according to Transfer Pricing Rules.
On 11 April 2016, the Israeli Tax Authority (ITA) released their official circular on internet activity of foreign companies in Israel, according to which foreign corporation may be regarded as carrying on business in Israel where the foreign company meets any of following conditions:
- Has a permanent establishment in Israel
- Has a local branch/employees/offices in Israel
- Provides services through an Israeli representative
- Has a significant digital presence in Israel
VAT registration of foreign resident in Israel requires the following:
- Appointing Israeli representative. A fiscal representative in Israel, can be an Individual or a company, both Israeli residents.
- Open Israeli bank account. Following prohibition of money laundering law act existing in Israel, this process might take a while.
- Registering in the Israeli Registrar of Company
- Filling several forms
- Submitting periodical VAT reporting to the VAT authorities
After registering for VAT purposes in Israel, the VAT dealer has to issue invoices on transactions made by him, within 14 days of the tax point, and include them on his VAT reports.